Why You Should Not Pay Off Your Student Loan Early

03/09/2013 17:42 BST
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Updated
03/11/2013 10:12 GMT

For many young Brits, student loans are the first significant debts they assume in their lifetimes. Unfortunately, they are rarely the last. Yet while these loans are designed to facilitate education, their recipients often have a surprising lack of knowledge about them. And while debt is understandably a source of stress for millions of people throughout the world, student loans in the UK are mercifully easy to manage and forgiving of the inevitable financial ups and downs everyone encounters. So although your student debt might be a source of nagging anxiety, this is why you should learn to relax, and stop trying to pay it off early:

Student Loans Basics

As of early 2013, about four million Brits have outstanding student loan debt. So you are not alone! For the vast majority of graduates, managing these loans requires almost no effort. Loan recipients pay back their debts on an income-dependent scheme.

Here's how it works: You only pay toward your student loans during fiscal years in which you have an income exceeding £16,365. Assuming you do earn in excess of this minimum, your payments will be 9% of whatever amount you make above £16,365. So, for example, if you earn £16,465, your payment will be £9 for that year. (This includes all sources of income, including bonuses and commissions.) So the more you earn, the larger your payments will be, and the faster you will ultimately pay off your debts.

Best of all, the payments are deducted directly from your paycheck. So paying back your student loans is relatively painless and extremely easy.

Your Responsibilities

Student loan recipients do, however, need to keep in mind a few important things. The first is that the system doesn't always function perfectly. In some cases, due to an oversight by your employer or the collection offices, your loan payments might not automatically be withdrawn from your paychecks. If this is the case, it is your responsibility to address the issue with your employer immediately, and to keep records of your effort to rectify the problem. If you fail to get it sorted, both you and your employer can face fines.

The second thing to watch for is the date when your loans are due to be paid off. Because the Student Loans Company (SLC) only assesses balances once each year, it is quite common for loan recipients to continue paying even after their debts are cleared. Refunds are always issued, but you can avoid the problem altogether by simply watching your balance and giving the SLC a call when it is nearly paid off.

Why You Shouldn't Pay It Off Early

There are many reasons you should not pay off your student loans early. For one, student loans do not affect your credit score. But more importantly, there is no real interest associated with student loans in the UK. The rates only increase in direct proportion to inflation; so it is always best to keep your excess cash in savings, where it can earn interest, rather than squandering your resources by paying the debts off early.

Another reason is that student debts are automatically voided after about 25 years. If you die, become unfit to work, or reach retirement age before managing to pay them off, don't worry. They simply disappear.

Thankfully, we Brits are quite fortunate to have such a well-run student loan program. As a result this encourages you to progress yourself and your knowledge by attending university regardless of background and social status. The cost of education is often staggering, and it has only become more so in recent years. However, we have the opportunity to acquire loans that do not put us under serious financial pressure and this means that we can put our degrees to work without the urgency to find high-paying jobs. This not only contributes to the promotion of arts and science in the UK, but also assuages a huge headache for young graduates.